Has Hamilton Thorne (CVE:HTL) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hamilton Thorne (CVE:HTL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hamilton Thorne, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = US$2.4m ÷ (US$67m - US$11m) (Based on the trailing twelve months to September 2020).

Therefore, Hamilton Thorne has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.9%.

Check out our latest analysis for Hamilton Thorne

Above you can see how the current ROCE for Hamilton Thorne compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hamilton Thorne here for free.

What Can We Tell From Hamilton Thorne's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 32% five years ago, while capital employed has grown 1,259%. Usually this isn't ideal, but given Hamilton Thorne conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hamilton Thorne probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Hamilton Thorne has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for Hamilton Thorne in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 585% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 2 warning signs for Hamilton Thorne you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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